When People Risk Becomes Price Reduction

HR Directors rarely sit at the deal table hoping to make life complicated.

Yet in mid-market transactions, people risk is one of the fastest routes to value erosion.

There remains a persistent belief that HR is a “soft” function and that people issues can be tidied up after completion. In a live transaction, nothing is soft. Everything is translated into price.

Buyers are not searching for reasons to meet your valuation. They are assessing risk. And risk, once identified, becomes a number. A price chip.

“We were comfortable at £20 million. Having completed due diligence, we believe £17.5 million is more appropriate.”

The £2.5 million gap rarely arises from stationery policy updates. It emerges from structural uncertainty about future earnings.

Research from PwC and Deloitte consistently highlights that human capital risk features prominently in deal failure and value erosion. Mercer’s M&A research consistently identifies cultural misalignment as a leading cause of post-deal underperformance.

Value is not simply EBITDA multiplied by a sector multiple. It is future profit multiplied by confidence.

Risk reduces confidence. Reduced confidence reduces price.

For HR Directors, that is not philosophical. It is commercial reality.

The Contractor Trap

High-growth businesses often build with contractors. It keeps fixed costs down and preserves flexibility. On an operational dashboard, this looks efficient.

Through a deal lens, it can look exposed.

Under UK employment law, status is determined by substance, not label. Control, mutuality of obligation and personal service remain central tests. IR35 reforms have heightened scrutiny, particularly in technology-led businesses.

If a “contractor” has worked full-time under supervision for several years, the potential exposure is not abstract:

• Employer National Insurance arrears

• Holiday pay under the Working Time Regulations

• Pension auto-enrolment liabilities

• Employment Tribunal risk

The founder may see a contained five-figure liability.

The buyer sees governance weakness.

If employment status has been loosely managed here, where else might compliance be light-touch? The impact is rarely a simple deduction. It is a recalibration of the multiple.

Discount applied to uncertainty.

If more than a modest proportion of your workforce would fail a rigorous status test, this is not flexibility. It is deferred cost.

Twelve months before a transaction, you can restructure. Twelve days before completion, you negotiate from weakness.

Founder Centrality and the Earn-Out Shift

Founder dependency is another common valuation leak.

Many founders are the commercial engine of the enterprise. They hold key client relationships, resolve disputes instinctively and carry institutional memory in their heads. Those qualities built the business.

In a transaction, centrality becomes fragility.

If revenue depends disproportionately on one individual, the earnings stream is not fully transferable. Buyers respond structurally. Upfront consideration reduces. Earn-outs expand. Deferred payments increase.

What begins as 80% cash may become 40% on completion, with the balance contingent on performance.

EY has repeatedly noted that leadership depth and succession visibility influence deal structure in mid-market exits.

This is not about diminishing the founder. It is about demonstrating that the business can operate independently of them.

For HR Directors, this means asking uncomfortable but necessary questions:

• Where does relationship ownership sit?

• Is commercial intelligence documented?

• Can senior leaders operate without escalation to the founder?

Owner dependency is not a personality trait. It is a transaction risk.

Culture Under Due Diligence

Culture rarely appears on a spreadsheet. It appears in integration modelling.

Entrepreneurial cultures often pride themselves on informality. Decisions are made quickly. Roles evolve organically. Accountability is relational rather than procedural.

Under normal trading conditions, that may work well.

Under due diligence, it prompts concern.

Buyers test whether governance exists beyond goodwill. Are reporting lines clear? Is performance managed consistently? Are grievances documented? Is there evidence of right-to-work compliance?

Mercer’s global M&A research repeatedly identifies cultural misalignment as a primary driver of integration failure.

For HR Directors, culture is not simply an engagement narrative. It is a valuation variable.

Momentum and the Data Room Test

Deals are endurance exercises.

When a buyer requests signed restrictive covenants for senior engineers and it takes weeks to locate them, the tone shifts. If they cannot be located at all, advisers widen their review.

Speed signals control.
Delay signals disorder.

A disorganised data room does more than irritate. It increases scrutiny. Questions multiply. Advisers are instructed. Confidence erodes.

People risk is not confined to litigation exposure. It is also the friction that slows a deal until the buyer’s appetite cools.

Translating HR into Deal Language

Preventing price reduction is not about doing more HR. It is about reframing HR through a commercial lens.

When compliance gaps are identified, do not report them administratively.

Do not say:
“There are inconsistencies in right-to-work documentation.”

Say instead:
“This gap could result in a six-figure escrow holdback or price adjustment.”

Boards understand transaction language. Use it.

Similarly:

• Test contractor status rigorously.

• Document revenue-critical relationships.

• Review incentive schemes for short-term extraction risk.

• Ensure contracts, covenants and policies are current and retrievable within 24 hours.

These are not housekeeping exercises. They are value protection mechanisms.

HR as Value Defence

In transactions, certainty commands a premium. Structure creates certainty.

People risk will always be examined. The only question is timing.

Surface it early and you protect price.
Leave it to due diligence and someone else will price it for you.

For HR Directors preparing for sale, the role is not peripheral. It is central.

Your work does not sit outside valuation.

It sits inside it.